September 18, 2014
Several rumors are rife in the global stock market over the launch of Chinese online retail giant Alibaba’s IPO this month on the Wall Street. Some of the experts are even speculating that Alibaba, after its IPO launch, might give a run to Apple Inc. for the position of ‘The Most Valuable Company’ on the planet in the coming future.
Alibaba’s IPO will be the biggest IPO in the history of New York stock exchange and will open the door on the world’s largest e-commerce market – China. Earlier in 2013, the Hangzhou-based company, with a merchandise volume of USD 248 billion, grossed more sales than that of America’s Amazon and eBay combined.
Recently termed as ‘a mix of Amazon, eBay and PayPal with a dash of Google’ by the global media, Alibaba Group Holding Ltd was established in 1999 by Jack Ma and is a privately-owned, Internet holding company. The company engages mainly in e-commerce as well as e-payments and mobile and social media applications, with a consumer base in China, India, Japan, Korea, Taiwan, the UK,
Hong Kong and the United States of America. It is a family of Internet-based businesses that includes online marketplaces that facilitate business-to-business (B2B) international and domestic China trade, retail and payment platforms, shopping search engine and distributed cloud computing services. Recent reports reveal that the Alibaba Group reaches Internet users in more than 240 countries and regions.
In May 2003, the group also started a consumer-to-consumer site called Taobao.com (very similar to eBay), on which a person could buy and sell any product imaginable. More recently it launched Tmall.com, a business-to-consumer (B2C) portal to facilitate global brands like Disney and Levi’s reach China’s middle classes (very similar to Amazon).
In 2004, the company also launched Alipay.com in 2004 which is a third-party online payment platform and has no transaction fees. The website provides an escrow service, in which a consumer could verify whether he or she is happy with the bought goods before releasing money to the seller. Alibaba claims that the service was offered keeping in mind China’s weak consumer protection laws, which have reduced consumer confidence in C2C and even B2C quality control.
The Chinese giant didn’t have any specific plans to list on the New York Stock Exchange. During its initial stage, Alibaba tried to list in Hong Kong, lobbying the Securities and Futures Commission and the stock exchange to be allowed to have a partnership structure that would have let its top executives nominate the majority of board members (the practice permissible on the NYSE). Founder Jack Ma raised this issue particularly as he wanted to keep full managerial control of his company, despite Japan’s Softbank and Yahoo! having 34.4% and 22.6% of Alibaba’s stakes, respectively.
In a statement, the company recently stated that under its agreement with Yahoo, it will be buying back 20% of Yahoo’s stake (for at least USD 7 billion) and Yahoo will have the right to trade-in a further 20% if Alibaba lists by December 2015. Analysts say that for this deal, Ma would rather accept a potentially lower market valuation and retain control of his company. However, investors in connection with Alibaba’s New York IPO need to be aware of the fact that it does not include Alipay – and may also wish to reflect on the fact that, by comparison, PayPal currently represents 43% of eBay’s revenue.
Experts say that Alibaba, even without Alipay, which is estimated to be at around USD 20 billion, still could be the largest IPO in the US corporate history and possibly in the world. This will imply an underlying market capitalization of at least USD 168 billion. While claiming that the market cap could actually be as high as USD 221 billion, a prominent market analyst has said: “Some of the experts believe that Alibaba could grow around 40% in FY2015 and over 30% in FY2016. This would imply USD 15.3 billion in revenue in Alibaba’s FY2016.”
Experts at The Economist said that the Alibaba Group at a market cap of USD 221 billion, would be the 15th biggest company in the world, at USD 168 billion it would be the 33rd biggest and even in the worst-case scenario at a market cap of USD 15.3 billion, it would only be the 257th biggest in terms of global revenue.
Jack Ma can be considered as the best suitable replacement for former Apple boss Steve Jobs, who died in 2011. As the most spirited and visionary entrepreneur. While predicting the market trends for the next century, a market expert says that the truly great companies will be those who will be successfully able to build global presence – both in China and the West – and will keep on doing breakthrough innovation at scale.
Rather than winning by default, what’s interesting about Alibaba is that, on a more level playing field, it managed to take on its Western equivalent, eBay, at home and win. Under Meg Whitman, eBay squandered an 85% market in e-commerce in China, after Alibaba launched its Taobao site. In a series of publicity stunts not unlike those of Virgin’s Richard Branson, Ma assumed the mantle of the underdog, proclaiming: “eBay may be a shark in the ocean, but I am a crocodile in the Yangzi river. If we fight in the ocean, we lose; but if we fight in the river, we win.”
Though it’s pretty certain that Alibaba can win at home, there are not yet enough signs that it can ‘Open Sesame’ on the Western markets. While commenting on the issue, a Chinese professor said: “Alibaba started as a bridge between China and other parts of the world. It was an import and export platform for the small to mid-sized importers in other parts of the world to find Chinese exporters.” The expert claimed that with 90% of Alibaba’s revenues coming from the domestic Chinese markets, the potential investors in the IPO should indeed understand that this a Chinese rather than a global play.
On the other hand, Apple, which is currently the world’s most valuable company, is performing pretty well in China. Though, Apple also operates to provide software and services, but by being primarily a hardware device maker, the company has managed to avoid some of the freedom of expression and big data pitfalls of other Silicon Valley companies entering China. In 2013 alone, Apple, which has a premium brand appealing to fashion-conscious Chinese consumers, did USD 37.9 billion of business in China, almost 4.5 times Alibaba’s current annual revenue. And with a long-awaited deal now completed to sell iPhones through China Mobile, the world’s largest cellular operator, last quarter Apple saw Chinese revenues jump 28%. So Alibaba is currently a great bet on China, whose sheer domestic scale alone gives it a prospect – but no certainty – of becoming “the most valuable company in the world”.
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